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S. 2244, Terrorism Risk Insurance Program Reauthorization Act of 2014

Correction: Reposted July 11, 2014, to correct a typographical error in the table on page 3 of the estimate.

As reported by the Senate Committee on Banking, Housing, and Urban Affairs on June 23, 2014

S. 2244 would extend the Terrorism Risk Insurance Act (TRIA) for seven years—through calendar year 2021. The bill also would increase the share of insured losses paid by private insurers under the program and require the Government Accountability Office (GAO) to prepare a report for the Congress that assesses the effects of collecting premiums on insurers that participate in the program.

The program requires insurance firms that sell commercial property and casualty insurance to offer clients insurance coverage for damages caused by terrorist attacks by foreign or domestic interests. Under TRIA, the federal government would help insurers cover losses in the event of a terrorist attack under certain conditions, and would impose assessments on the insurance industry to recover all or a portion of the federal payments. The program is set to expire at the end of calendar year 2014; no federal payments have been made under the program since its inception in 2002.

There is no reliable way to predict how much insured damage terrorists might cause, if any, in any specific year. Rather, CBO’s estimate of the cost of financial assistance provided under the bill represents an expected value of payments from the program—a weighted average that reflects industry experts’ opinions of the probability of various outcomes ranging from zero damages up to very large damages resulting from possible future terrorist attacks. The expected value can be thought of as the amount of an insurance premium that would be necessary to just offset the government’s expected losses from providing this insurance, although firms do not pay any upfront premium for the federal assistance available under TRIA.

On this basis, CBO estimates that enacting the bill would increase direct spending by $1.7 billion over the 2015-2019 period and by $3.5 billion over the 2015-2024 period. An additional $460 million would be spent after 2024.

CBO estimates that enacting the legislation also would increase revenues. S. 2244 would direct the Department of the Treasury to recoup some or all of the costs of providing financial assistance through taxes imposed on certain policyholders (referred to as surcharges in the legislation). CBO expects that federal spending for financial assistance to insurers would be largely offset (on a cash basis) by an increase in revenues. We expect that, following a covered loss, the Secretary of the Treasury would impose those surcharges in a way that meets the deadlines for collections specified in the bill. Thus, CBO estimates that enacting the recoupment provision in the bill would increase revenues by about $1.8 billion over the 2015-2019 period and by about $4.0 billion over the 2015-2024 period, net of income and payroll tax offsets.

Considering both the direct spending and revenue impacts of the bill, CBO estimates that enacting the bill would reduce budget deficits by $460 million over the 2015-2024 period. Federal spending, however, would continue beyond 2024; CBO estimates that over the full term of federal financial assistance, revenues would fully offset direct spending, resulting in no net effect on the deficit.

The bill would impose intergovernmental and private-sector mandates as defined in the Unfunded Mandates Reform Act (UMRA) by extending and expanding some requirements on insurers and policyholders, including the payment of surcharges. State, local, or tribal governments could be required to pay a surcharge as purchasers of property and casualty insurance, but CBO estimates that the aggregate cost to public entities of complying with those mandates would probably fall below the annual threshold established in UMRA ($76 million for intergovernmental mandates in 2014, adjusted annually for inflation). CBO estimates that the aggregate cost to private insurers and policyholders to comply with those mandates would exceed the annual threshold established in UMRA ($152 million in 2014, adjusted annually for inflation) in each year policyholders pay a surcharge.